Crowdfunding untested in residential property market, says CML

Crowdfunding untested in residential property market, says CML

Recent years have borne witness to an ever increasing influence of the internet on the process of buying and selling property. The UK in particular has seen property websites such as portals Rightmove and Zoopla, become major players in the residential property market.

The internet has also had a drastic effect upon the mortgage market. But what if you can’t afford a mortgage or it simply doesn’t suit you? In answer to this question, Crowdfunding has been proposed as an enabling method of property investment with increasing frequency.
According to a recent report by the Council for Mortgage Lenders (CML) which quoted figures from Forbes:
“The global crowdfunding economy had grown to be worth more than $5 billion in 2013. Despite rapid growth, however, crowdfunding remains tiny compared to the mortgage market – with the Forbes’ estimate equivalent to only around one-fifth of what UK lenders advances to borrowers in a single month.”

The above analysis illustrates that crowdfunding, in terms of property purchases, is still in its infancy, but it is the potential for growth which has sparked the interest of many including the CML.
As the recent high profile launch of UK based crowdfunding platform Property Partner proves, crowdfunding is here to stay, so what of the drawbacks?
According to the CML, property crowdfunding is untested with regard to adverse market conditions and as a result it is difficult to predict how a crowdfunded, property based platform would survive and protect its customers, were there to be a major downturn in the property market. In fact the main tenet of the CMLs concerns point more or less to the “what if” scenarios that in theory can be applied to any type of investment.

The problem of applying the “what if” analysis to crowdfunding is that the history of crowdfunding is too short to enable claims of long traditions of stability and success. Though, in fairness, given the last eight years or so of economic and financial turmoil across all markets, how many mortgage lenders and property investment firms can truly say this in any case?
The more concerning issues with regard to crowdfunding, as pointed out by the CML, were highlighted in a recent assessment by the Financial Conduct Authority (FCA). It found major issues with feedback following negative customer experiences and cited balance and transparency problems that need to be addressed.
The FCA also found that the negative risks of crowdfunding property investment required greater exposure on crowdfunding websites.
The CML report concludes that while crowdfunding can provide alternative options for potential investors, it is as yet untested by challenging market conditions and so it may present an element of unquantifiable risk to the investor. It also asserts that an evolving degree of regulation will undoubtedly impact on the way crowdfunding will operate in the UK.

By Cathal Leonard
Cathal is a land and property marketer with knowledge of both UK and emerging property markets. Cathal uses his vast experience to keep us updated on the real estate investment market.
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